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Bringing International Accounting Issues into the
ClassroomIsabel Wang
Associate professor
Department of Accounting & Information Systems
Broad School of BusinessMichigan State University
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Friedman (2005): the world is flat...
However, accounting is still diverse.
Why Care?
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Environmental Factors Leading to Accounting Diversity
Inflation Some countries have historically high rates of inflation. This is common in Latin American countries. Given extended periods of low inflation in the U.S.,
inflation accounting is not required. Political and economic ties
These linkages tend to make information sharing easier. Nations that share ties often have similar accounting
systems, such as France and former colonies in western Africa.
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Environmental Factors Leading to Accounting Diversity
Taxation U.S.--taxable income and book income are generally quite
different. Germany--rules governing taxable and book income tend to be the
same, which generally results in more conservative accounting. Deferred taxes are less of an issue in code law countries.
Providers of financing In many countries major sources of capital are families, banks, and
the government. Accounting and disclosure in those countries tend to be less
important. But accounting and disclosure are more important where providers of financing are diverse shareholders (e.g, U.S. and U.K.).
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Environmental Factors Leading to Accounting Diversity
Legal systems --Common law Has relatively fewer statutes and more interpretation by courts to apply
laws to specific situations Leads to the creation of precedents or case law Found most often in Great Britain and other English-speaking countries The source of accounting rules tends to be non-governmental
organizations. Legal systems --Code law
Characterized by relatively more statutes Found more often in non English-speaking countries Accounting rules in these countries tend to be legislated (i.e., the
source is the government). Less specific, so other sources needed to provide guidance
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Form 20-F Required by the SEC for companies using non-U.S. GAAP Reconciles net income and stockholders’ equity from the
other GAAP to U.S. GAAP Compliance Week (2007): Denis Duverne, chief
financial officer of AXA Group, estimated that his company would save $25 million if the reconciliation requirement is dropped. William Widdowson, head of group accounting policy at UBS, said the reconciliation adds 30 pages to the Swiss bank’s filing, contributing to the problem of “information overload.”
Dealing with Accounting Diversity
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Year 2007 Year 2008 Total
IFRS LOCALGAAP US GAAP
IFRS 88 1 0 89LOCAL GAAP 5 147 9 161
US GAAP 5 1 237 243
Total98 149 246 493
What Do Cross-listed Firms Choose?- Jiang, Petroni, Wang (2010)
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2010.04SEC staff work plan
2010.08FASB
Chairman resignation
2011.04FASB
progress report
A Tale of Two Boards – a long march
2008.09FASB/
IASB roadmap update
2009.04
Schapiro’s View
2009.11
FASB reaffirmed commitment
2002.09
Norwalk
Agreement
2006.02
FASB/IASB Roadmap
2008.08SEC Roadma
p
2011. 05SEC
alternative approach:
condorsement
2012. 07SEC Final
Staff Report
2013. 04SEC new
chairman Mary Jo White
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09/18/2002: The Norwalk Agreement commitment to develop “high quality, compatible accounting
standards that could be used for both domestic and cross-border financial reporting.”
2/27/2006: FASB/IASB Roadmap MoU: by 2008 reach a conclusion about whether major
differences should be eliminated in a few focused area; make significant progress on joint projects needing improvement
In 2007 the SEC removed the reconciliation requirement for non-U.S. companies that are registered in the United States and use IFRSs as issued by the IASB.
08/27/2008: SEC Roadmap Set forth seven milestones that, if achieved, could lead to
mandatory adoption of IFRS by US issuers in 2014. Determine whether to proceed with the above timeline in 2011
Key Events
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Issued Nov 2008By 2014 may see IFRS required in USEarly use permitted in 2010
For large firms in industries where IFRS is predominantDecide in 2010 whether 2014 will be deadline
Comments were due Feb 2009Status:
Fall 2009: SEC draft strategic plan proposes to promote ongoing convergence “where appropriate” between the FASB and IASB
Goal of significant convergence by end of 2011.
SEC’s Proposed Road Map
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09/2008: Update to FASB/IASB Roadmap Short-term convergence projects completed: Fair value option,
R&D for FASB; borrowing costs and segment reporting for IASB 4/07/2009: Chairman Schapiro’s view
CFO.com "I will not be bound by the existing roadmap that's out for public comment," and expressing reservations about quality of IFRS and the independence of the International Accounting Standards Board, which writes those rules.”
11/05/2009: FASB Reaffirm Commitment Discuss plans for completing major joint projects by the end of June 2011.
04/2010: SEC staff work plan No early adoption Schapiro stressed that the commission is “on track to make a recommendation
in 2011,” but mandatory IFRS adoption is a highly significant decision that would be made only if it is certain that it is the best move for investors and the companies involved
Key Events
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8/24/2010: FASB chairman Herz unexpected resignation
4/21/2011: FASB progress report Reaffirm commitment to convergence As of November 2010, priority projects include our joint
projects on financial instruments, revenue recognition, leasing, insurance contracts, the presentation of other comprehensive income, fair value measurement, and the consolidation of investment companies
As of April 2011, the number of remaining priority MoU projects is reduced to three (revenue recognition, leasing and financial instruments). Extended the timetable for the remaining priority MoU convergence projects and insurance beyond June 2011 to permit further work and consultation with stakeholders.
Key Events
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May 26, 2011: SEC outlines “an alternative way of merging U.S. and international accounting standards that could keep down transition costs, especially for small issuers.” (Reuters, May 26, 2011)
July 13, 2012: SEC Final Staff Report – no recommendation; chief accountant resigned
April 8, 2013: Mary Jo White as new SEC chairman – IFRS decision on her to-do list
What do we do?
Wait-and-see
Recent Development
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External Political Environment-Financial Accounting
Japan2010*/2016 ?
Australia 2005
Canada2009*/2011
China2007
Brazil2010
India 2011
South Africa2005
Mexico2012
United States 2015 ?
Argentina 2012
Adopted or will adopt
Developing plans to adopt
No plans or unknown
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Over 12,000 companies in about 120 nationsEuropean Union
Required to use IFRS since 20059,000 companies400 trade on US markets
Switched to IFRSAustralia, New Zealand, South Africa, Singapore, Hong Kong, Philippines,
Korea, CanadaStopped creating their own GAAP and use some form of IFRS
Croatia, Costa Rica, Cyprus, Dominican Republic, Ecuador, Guatemala, Haiti, Honduras, Jamaica, Kenya, Malta, Mauritius, Napa, Oman, Panama, Tanzania, Tajikistan, Trinidad, and United Arab Emirates
Planned switch to IFRS India, JapanDelayed adoption – India (postponed to April 2012)http://
www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-status-country.jhtml
Adoption of IFRS
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• Canada, Australia – have adopted, but…
• China – has converged, but allows pooling and purchase methods
• India – IFRS optional, over 60 carve-outs
• U.S. – Herz: no convergence for 10-15 years (CFO.com, April 20, 2009)
IFRS Adoption vs. Convergence
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IFRS Lower of cost or net realizable value (NRV); LIFO - prohibited; Write-down reversible - allowed
US GAAP Lower of cost or market; LIFO - allowed; Write-down reversible - prohibited
IFRS-US GAAP Major Differences - Inventory
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IFRS Cost model (same as GAAP) Revaluation model (fair value based; entire
class of assets) US GAAP
Only cost model allowed
IFRS-US GAAP Major Differences – PP&E
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IFRS Purchased: cost model & revaluation model Internally generated
R– research expenditures (expense), D- development expenditures (capitalize/deferred); If can’t distinguish the two, expense.
US GAAP Purchased: cost model Internally generated: expense all
IFRS-US GAAP Major Differences – Intangible Assets
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IFRS – one step impaired when carrying value (book value) exceeds
recoverable amount. Recoverable amount = the greater of net selling price and
value in use Impairment loss reversible, but not to exceed what it would
have been if no impairment loss had been recognized.US GAAP – two step approach
Step 1: Recoverability test (undiscounted future cash flows) Step 2: Impairment loss = C.V. – fair value Impairment loss: not reversible if held for use, reversible if
held for sale
IFRS-US GAAP Major Differences – Impairment
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IFRS - two alternatives Expense all borrowing cost in the period incurred
(eliminated due to convergence) Capitalize to the extent they’re attributable to
acquisition, construction, or production of qualifying assets; expense other borrowing costs
US GAAP Capitalization of borrowing costs directly attributable
to acquisition, construction, or production of qualifying assets
IFRS-US GAAP Major Differences – Borrowing Costs
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Books Introductory - International Accounting and
Multinational Enterprises, 6th Edition by L. Radebaugh, S. J. Gray, & E. Black; OR IFRS primer: International GAAP basics, U.S. edition by I. Wiecek & N. Young
Integrated entry level - Financial and Managerial Accounting: The Basis for Business Decisions 16th
Edition OR Financial Accounting 15th Edition, by Williams, Haka, Bettner, & Carcello, McGraw-Hill/Irwin, 2012
Upper level financial - International Accounting, 3rd edition by T. Doupnik & H. Perera, McGraw-Hill Irwin, 2011 OR International Accounting, 7th edition, by F. Choi & G. Meeks, Pearson, 2010
Where to Get More Information
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Journals - International The International Journal of Accounting Advances in International Accounting Journal of International Business Studies
Journals - AAA Journal of International Accounting Research Accounting Horizons Issues in Accounting Education
Other Management Accounting Journal of Accountancy Economist
Where to Get More Information
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Where to Get More Information- AAACommons
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Firms with web based IFRS materials: KPMG: www.kpmginstitutes.com/ifrs-institute/ Ernst & Young: a private password protected website at www.ey.com/us/ifrs. To
request an account, please contact the EY ARC Program Director, Catherine Banks, at [email protected].
PWC: IFRS Readywww.pwc.com/extweb/aboutus.nsf/docid/70CCD8B601397905852574910075A03Dwww.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/pwc-ifrs-by-country-apr-2012.pdf Deloitte: www.iasplus.com/index.htm; IFRS University Consortium
http://www.deloitte.com/us/ifrs/consortium; Table about use (adoption or convergence or…) of IFRS by Jurisdiction: www.iasplus.com/country/useias.htm
Other FASB: www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663 IASB: www.ifrs.org/Use+around+the+world/Use+around+the+world.htm AICPA:
www.aicpa.org/BecomeACPA/CPAExam/ForCandidates/FAQ/Pages/IFRS_FAQs.aspx IAAER: www.iaaer.org/resources/
Where to Get More Information- websites
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Case Books International Accounting: A Case Approach edited by
Schweikart, Gray and Roberts, McGraw-Hill
Cases- Journals Issues in Accounting Education: (e.g., Nov. 2007, vol. 22, no.
4)
Cases - websites http://
www.ifrs.com/overview/financial_listing.html(AICPA) Accounting firms’ websites
[email protected] [email protected]
Where to Get More Information